Midwest gasoline sees more problems, but could be worse

Midwest Nightmare

To make matters worse Bloomberg News reports that "Refiners may be forced to exceed 10% ethanol in their fuels next year in order to meet congressionally mandated renewable-fuel standards, according the Environmental Protection Agency. While oil-industry lobbyists are urging lawmakers to scrap the Renewable Fuel Standard because of problems this year, an EPA official will tell Congress today that issues with the "blend wall" -- where the amount of mandated corn-based fuel exceeds levels considered safe for all engines -- won't bite until 2014.

"Given these facts, we will continue to look at the potential impacts of the blend wall over the near and longer term," Christopher Grundler, director of the office of transportation and air quality at the EPA said in testimony prepared for delivery today to a panel of the House Energy and Commerce committee. "EPA will continue to engage with stakeholders on this issue as we move to propose the RFS volume requirements for 2014." The Renewable Fuel Standard, or RFS, dates in its current form to 2007, when concerns about dependence on overseas oil and a desire to curb the use of fossil fuels induced Congress to set quotas for the use of alternatives to gasoline or diesel, such as corn-based ethanol and biodiesel.

Under the law, refiners such as Exxon Mobil Corp. must blend a certain volume of renewable fuels into their gasoline each year regardless of the total amount of fuel produced. When fuel use falls, it effectively boosts the amount of ethanol in the gasoline and other fuels. The EPA and renewable-fuel producers say the mandate spurs production of American-made fuels, helps corn farmers and cuts carbon emissions by replacing gasoline. Lobbyists representing refiners such as Exxon, based in Irving, Texas, say falling U.S. fuel demand means that requirements for ethanol may force its use higher than the 10% that the government says is safe for all engines.

In his testimony today, Grundler said that higher blends of ethanol may need to be used to meet the requirements, or "significant additional volumes of non-ethanol biofuels would be needed." While EPA acknowledged the issues of refiners, a Department of Agriculture official shot down concerns from chain restaurants, food charities and chicken producers that the fuel standard is raising the cost of food. "Any increase in farm prices for corn and soybeans due to increased biofuels production has likely had only a small effect on U.S. retail food prices," Joseph Glauber, chief economist of USDA, said in his testimony to the panel."

Oil was kind of neutral to bearish in the EIA report but the movement in gasoline and the stock-market also influenced moves. Bond yields backed off as a weak GDP eased the fears that the Federal Reserve would take away the taper punch too soon. We are also seeing oil try to get a feel out of Europe where S&P gave a less than enthusiastic assessment of the European economy. It was a zombie like forecast where they do not see a recession but at the same time there are not looking for a lot of growth either. Dow Jones reports that "Asia's crude oil market is picking up as peak summer demand sets in and refining capacity comes back online, but fundamentals are weak with Japanese demand slowing". Japanese refiner Showa Shell Sekiyu says 3Q crude throughput will be 2% lower than last year at 462,860 bbl/day. While Asian imports of Iranian crude has fallen this year, China was the only of the big consumers to increase imports from Iran. JBC Energy estimates China's 2Q imports stood at 480,000 bbl/day and predicts an increase to 500,000 bbl/day in 3Q. Dubai raises its official selling price for September crude by 10 cents to +$0.05/bbl to the Oman OSP. DME Oman for August delivery settles 53 cents higher at $99.35/bbl. We still from a position standpoint like the short side of oil but there have been some great day trading opportunities as well. Nat gas expiration of the July contract was above the all-important 370 area. Probably a great day to price out some long dated calls!

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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